J. Edward Ketz is uniquely qualified to discuss the technical aspects of CEO pay judging by his resume - an accounting professor at The Pennsylvania State University focusing on financial accounting and accounting ethics, he also wrote Hidden Financial Risk, a book that explores the cause of recent accounting scandals. The following is an excerpt from the SmartPros.com opinion article “Politics of CEO Pay:”

The class division may not be as bad as slavery, but everyday Americans are unhappy with their lot. Who can blame them as the good jobs are outsourced to foreign lands and eliminated in corporate restructurings? Poorly paid service jobs have replaced the better paying jobs. Firms like Walmart do all they can to keep the low-paying jobs low. I have a nephew who was recently fired from Walmart after working there a number of years and receiving several raises. His boss told him that he could get his job back if he were willing to receive the minimum wage. Does that sound fair?

The disparity in pay might not be badly received if laborers felt that executives had so much greater skill and added a tremendous amount of value to the firm. Given what has happened in the credit markets, however, I believe that the average citizen is questioning the competence of corporate executives. If these privileged executives really knew what they were doing and really made incisive decisions, then how did the meltdown occur in the credit markets? And why should CEOs be spared their jobs when Americans, right and left, are losing their homes? When the average Joe or Jane makes mistakes, they lose their job. Why don't more CEOs get the axe because of their incompetence? And, when they are let go, why are they entitled to a severance pay that others can get only if they win the lottery?

Additionally, the disparity in pay might not be badly received if Americans thought that the executives were morally straight and honest and trustworthy. Given the thousands of accounting restatements over the years, that image has been shattered. Watching corporate officials pay huge fines and go to prison, one instead wonders how a person could become so greedy or how corporate big shots can envision corporate assets as their own. This point is driven home by jokes like child in a sandbox telling the other that his mom said it was ok to talk with strangers as long as they weren't CEOs…

At this point I do not think Americans are ready to rebel in any significant way. But, if CEOs continue to mold themselves into nobles like the French aristocrats of the 18th century while the wealth of average Americans continues to evaporate, don't be surprised if a decade or so from now the little guys storm an American Bastille, metaphorically or literally. Aggrieved peons and urban wage-earners can take only so much of this self-aggrandizement.

DolmatConnell & Partners, Inc., an independent executive compensation consulting firm, released today their 2008 Tech100 and LifeScience100 Studies. These studies, now in their fourth and second year respectively, provide insight into the evolving world of executive compensation in the 100 largest publicly traded High Technology and Life Science companies in the U.S.

Changes in CEO pay level varied significantly between the two studies and were linked to overall industry performance levels. In the Tech100, CEO base salaries increased 3.8% and actual total cash compensation increased 2.9%, while total direct compensation (base + actual bonus + annual long-term incentive grant values) fell 0.6%. This was in line with a median annual total shareholder return for the industry which was 1.6%. The picture in the LifeScience100 was vastly different, with a median total shareholder return of 14.4% last year. CEO base salaries increased 5.6%, actual total cash compensation increased 10.3%, and total direct compensation rose 11.8%.

Pay-for-performance is dramatically improving, as Boards and Compensation Committees are responding to shareholder concerns with respect to executive pay. DolmatConnell & Partners looked at the Top 20 and Bottom 20 performing companies in each industry and found several encouraging results.

In the Tech100, median target bonuses for the Top 20 performing companies were 120% of base salary and actual bonus payouts were 139% of target ($1.4M), whereas in the Bottom 20 companies, median target bonuses were 150% of base salary, and actual bonus payouts were only 19% of target ($225K). Bonus payouts in the LifeScience100 followed similar trends. Says Jack Dolmat- Connell, CEO of DolmatConnell & Partners, "It is great to see that Boards are finally getting tough relative to the pay of underperforming CEOs. This is what has infuriated investors for years -- high pay for mediocre or poor results."

Most studies of executive compensation look at the aggregate value of base salary, actual bonus and the annual long-term incentive grant values in a given year, also known as "pay opportunity" for a given year. In addition to this, the DolmatConnell & Partners' studies looked at the value of compensation "realized" in a given year -- what executives actually took home. The results of this new look are stunning -- CEOs at Top 20 companies in the Tech100 realized $9.0M in 2007, whereas CEOs at Bottom 20 companies realized only $3.4M, a very significant difference in compensation based on performance. Unrealized compensation (the value of equity still outstanding) differences were even more dramatic -- CEOs of Top 20 companies held equity worth $45.0M, while the equity outstanding of the CEOs of the Bottom 20 was worth only $8.1M. Says Dolmat-Connell, "This is incredibly positive news based on a completely new and better way of looking at executive pay. It is also fascinating to note that the vast majority of the value of the equity held by CEOs in the Top 20 was in the form of stock options, an investor- friendly long-term incentive vehicle, whereas the majority of the value of the equity held by the Bottom 20 CEOs was in the form of time-based restricted shares, a very investor-unfriendly vehicle."

Angelo Mozilo, chairman and chief executive officer of Countrywide Financial (NYSE: CFC), had compensation dropped 79% to $10.8 million last year - though more than $10 million isn't bad for an executive that drove his company to the brink of total disaster.

In an embarrassing incident for the company, it has recently come out that Mozilo also accidentally responded to an e-mail from a borrower. Here is the excerpted exchange:

“I am writing this letter to explain my unfortunate set of circumstances that have caused me to become delinquent on my mortgage. I have done everything in my power to make ends meet but unfortunately I have fallen short and would like you to consider working with me to modify my loan. My number one goal is to keep my home that I have lived in for sixteen years, remodeled with my own sweat equity…this home means the world to me…. it’s to the point where I cannot afford to pay what is owed to Countrywide. It is my full intention to pay what I owe. But at this time I have exhausted all of my income and resources so I am turning to you for help.”
–Countrywide borrower Dan Bailey

“This is unbelievable. Most of these letters now have the same wording. Obviously they are being counseled by some other person or by the internet. Disgusting.“
–Countrywide Financial founder, Mozilo

Mozilo was indeed correct, the e-mail was guided by a form letter available on an Internet forum, but the incident and wording are doing nothing to help his reputation.

From "Despite Candidate Criticism, CEOs Still Players in Presidential Race" by Alex Knott and Jonathan Allen of CQPolitics.com, a reminder of the difference between politicians' rhetoric and actions regarding executive compensation:

The three remaining presidential candidates have made an art of bashing top corporate executives at public campaign rallies and a science of cashing in on their profits behind closed doors.

According to a new study by CQ MoneyLine, at least 170 of the chief executive officers of American companies ranked in the top 1,000 by Fortune Magazine have donated to Democratic frontrunner Barack Obama of Illinois, his rival Hillary Rodham Clinton of New York, presumed Republican nominee John McCain or some combination of the three.

Heads of companies that had a combined revenue of $2.5 trillion in 2007 contributed a total of $575,000, a pittance in presidential-level campaign finance circles but an indication that the nation’s business executives have not been muscled out of the influence arena by anti-corporate campaign rhetoric or promises of reform.

The set of CEO donors represents a broad cross-section of the titans of American business, spanning 56 industries. Many of them have given the maximum amount allowable, even as they are targeted for scorn on the campaign trail. That amount is $2300 for each election - primary and general are considered separate elections.

McCain, with 102 CEO donors, has accepted $282,000, easily outpacing Clinton’s $164,000 from 54 of the Fortune 1000 CEOs and more than double the $130,000 Obama has accepted from 45 of the nation’s chief executives.

“This isn’t just about expressing outrage,’’ Obama said last month as he spotlighted his support for Rep. Barney Frank ’s legislation giving shareholders a non-binding vote on CEO pay. ‘‘It’s about changing a system where bad behavior is rewarded so that we can hold CEOs accountable, and make sure they’re acting in a way that’s good for their company, good for our economy and good for America, not just good for themselves.’’

Obama, who makes a point of saying he takes no money from political action committees or federal lobbyists, has cashed checks from executives across the American corporate spectrum, including drug companies and oil companies.

McCain also has found fault with the nation’s top executives in very public arenas.

“Americans are also right to be offended when the extravagant salaries and severance deals of CEOs — in some cases, the very same CEOs who helped to bring on these market troubles — bear no relation to the success of the company or the wishes of shareholders,” he said in an economic speech the same week as Obama’s comments.

Clinton’s populist message has showcased how CEO pay has outpaced that of average Americans saying that these company leaders salaries have grown to “262 times the typical worker” in recent years.

“The CEOs and the boards of these companies are not sharing the wealth,” said Clinton, in a November speech on the economy. “So companies are actually profiting off of keeping workers’ wages stagnant.”

From Economist.com:

There are few things on which all three presidential candidates agree, but one of them is that something ought to be done to curb excessive CEO pay. Even John McCain, the candidate of the traditionally business-friendly Republican party, warns of a growing popular backlash against pay packages for top executives that would make Croesus blush.

The belief that executive pay is out of control rests on several arguments. This column considers three of them. The first is that the gap between the earnings of executives and rank-and-file workers is big and growing. The second is that top bosses' rewards keep rising even when profits fall. And the third is that investors have too little influence over pay packages agreed behind closed doors by imperial chief executives and their cronies on boards’ remuneration committees.

That the gap between earnings at the top and bottom of the corporate ladder has grown is not in dispute. According to figures from the Congressional Research Service, an arm of America's Congress, the average pay of American CEOs is now 180 times greater than that of workers, up from 90 times in 1994. Critics charge that this doubling has created huge resentment amongst ordinary workers, whose jobs are becoming more precarious as the economy weakens.

But while CEOs' rewards are undoubtedly the subject of heated debate around the nation's water coolers, their hefty earnings largely reflect significant changes in the marketplace, not boardroom backscratching. Over the past 14 years, technological innovation, globalisation and a host of other trends have made it much harder to steer huge companies to success. The best corporate navigators are highly sought after, so it's hardly surprising that they command a much bigger premium than the average employee.

There are, however, some grounds for concern, notably when a CEO earns vastly more than the rest of the senior management team. Jeff Immelt, the boss of General Electric (NYSE: GE), has described as “lunacy” deals that give bosses packages worth up to 20 times more than those of their immediate subordinates. Mr Immelt—whose own poor performance at GE recently has raised questions about whether he is worth his pay packet—has said he earns between two and three times as much as his top lieutenants.

Pay activists point to the recent debacle on Wall Street as further proof that the CEO pay system is seriously flawed. They cite the cases of Angelo Mozilo, the head of Countrywide (NYSE: CFC), America's biggest mortgage lender, and Charles Prince, the ex-CEO of Citigroup (NYSE: C), who both pocketed millions of dollars as their companies ran into deep trouble. Expect more outraged headlines in 2008 as CEOs cash in stock options and other incentives awarded years ago, while share prices and earnings tumble.

Yet there are signs that poor performance is leading to lower pay. Mercer, a firm that advises companies on compensation matters, has analysed the latest regulatory filings of a sample of 350 firms in the Fortune 1000. In a report published on May 15th, it noted that median total direct compensation—defined as base salary, short-term incentives and the expected value of long-term incentives granted in the fiscal year covered by the filing—for the CEOs of the 50 largest companies in its sample was $14m in 2007, almost 16% lower than in 2006.

Mercer's study also says boards are rethinking how to reward long-term performance. Rather than issuing standard options or grants based on absolute movements in firms' share prices, they are looking at schemes that link payouts to relative performance against an external index or industry peer group. And in some cases they are using strategic and operational benchmarks as measures. The snag with all of these schemes is that they can pay out handsomely even if share prices fall.

Board members may consider this a price worth paying to keep top talent on board at a time when stockmarkets are very volatile. Return-hungry shareholders, however, may disagree. A growing number of institutional investors are pushing for the right to vote on proposed compensation plans for top managers. But such reasonable demands for greater transparency are being met with stiff resistance in many boardrooms.

Four cheers, then, for Aflac (NYSE: AFL), a Georgia-based health insurer with $14.5 billion in revenue, which made history on May 5th when it became the first American public company to put its proposed compensation plan to the vote. Approved by 93% of the votes cast at its annual general meeting, the plan included a new pay package for Dan Amos, the firm's CEO, who earned $85.6m in 2007, $70.8m of which came from stock options that vested during the year.

Given Mr Amos's track record, such a result is hardly surprising: between August 1990, when he became Aflac's boss, and the end of last year, the company's total return to shareholders rose by a whopping 3867%; over the same period, the S&P 500 delivered a total return of 549%.

Bosses of poor performers will be far less keen to put their pay under a shareholder spotlight, but the pressure to do so is growing inexorably. Risk Metrics Group, a consulting firm, reckons 82 motions have been filed so far in 2008 calling for “say on pay” policies. Looks like America's presidential candidates will not be the only ones fretting about votes this year.

From Minnesota's Star Tribune, writer Chris Serres looks at CEO pay benchmarks:

"For the shareholders of Regis Corp. (NYSE: RGS), 2007 was a bad hair year.

Profit at the hairstyling company, which owns the Vidal Sassoon and Supercuts chains, fell 24 percent on slower sales growth and higher expenses.

But that limp performance didn't stop the company's board from awarding CEO Paul Finkelstein a $1.06 million salary -- up 19 percent over 2006 -- and a $747,000 bonus, up 118 percent from a year earlier.

In an era of increased scrutiny of executive pay practices, it may seem perilous for corporate boards to reward an underperforming CEO with a generous raise. Yet the practice continues, in part because of the long-standing custom of basing executives' compensation on the pay of their peers. Known as "competitive benchmarking," it has contributed to the runaway inflation in executive pay, corporate compensation experts say.

Finkelstein got his compensation package in part because Regis compares his pay with 15 companies, several of which are much larger than the operator of hair salons. Among them is coffee giant Starbucks Corp., which has nine times the market value and last year collected 3.6 times more revenue than Regis. That's comparing coffee and coiffeur.

H&R Block also made it on Regis' list of peers, although the tax preparer has six times the market value and 1.5 times the revenue.

Regis chief financial officer Randy Pearce defended the choice of Starbucks and H&R Block, noting that both are service-related companies with a national footprint like Regis, which has 13,500 hair salons.

And both cater to a "moderate customer" in terms of income and style. "Regis looks for peer companies that appeal more to the masses," Pearce said.

Oracle Corporation (NASDAQ: ORCL) founder and CEO Larry Ellison took home the title of highest paid CEO last year according to Forbes.

Looking at the 500 biggest U.S. companies, Forbes named Ellison the highest paid because though he has a salary of "only" $1 million, he exercised stock options worth $182 million.

For 2007, Oracle's stock price moved up about $5 to $22 from about $17 - adding $25 billion in market capitalization.

The more talked-about story from the report was that last year's #1, Apple Inc. (NASDAQ: AAPL) icon Steve Jobs, dropped to #120 with compensation of $14.6 million. The year before Jobs made nearly $650 million from restricted stock grants.

Consulting firm Mercer released its annual study of CEO pay, the summary of which is below:

"The drive for responsible executive pay continues to gain traction as new proxy rules require companies to disclose the value of compensation, benefits and perquisites.  While the median change in CEO total direct compensation (salary, bonus and long-term incentives) was 8.9%, corporate net income increased by 14.4%, up from 13% in 2005, and total shareholder return was 15.1%, more than double the 6.8% return in 2005. Companies heard the message that pay has to be linked to performance:  Over half of the companies granted performance shares – shares that are earned only if performance goals are met – according to the Mercer Human Resource Consulting 2006 CEO Compensation Survey. The annual survey of the latest proxy filings of 350 large public companies was published today in The Wall Street Journal.


The long-awaited total compensation numbers are in, disclosed for the first time this year: According to the Mercer 350 study, total compensation (total direct compensation plus benefits and perquisites) is not as eye-popping as expected.

 

Mercer reports a median total of $8.2 million.  The new elements totaled less than $1.3 million at the median or approximately 15% of the median CEO package.  Most of the added value came from the annual increase in pension values; the reported median increase was approximately $1.0 million.


CEO base salary increased to a median $995,000 after having been at $975,000 for two years. Constant incumbent CEOs received a median increase of 4.1%, higher than the median increase of 3.6% in 2005. In 2006, about one quarter of the CEOs did not get a pay increase; boards were tougher in 2005, when one third of the sample did not get a pay increase.


Median total cash compensation – salary and annual bonus – rose to $2.6 million, slightly higher than the $2.4 million reported in 2005.  The median increase for constant incumbent CEOs was 7.1%, the same rate as in 2005.  An increase in total cash is not surprising given strong corporate performance.  Median net income rose 14.4%.


The big story this year is that, as predicted, long-term incentives (LTI) are being linked to performance, Mercer's survey found. The number of CEOs receiving option grants declined from 192 in 2005 to 185 in 2006, and the number of CEOs receiving restricted stock grants declined from 181 to 172 in the same period.  However, the number of CEOs receiving performance shares, including performance-contingent restricted stock, jumped from 111 in 2005 to 178 in 2006.  The portion of the CEOs' LTI pay that was made up of performance-based shares and units jumped in the period 2005 to 2006 from 21% of the LTI pay mix to 31%, while restricted stock was stable, rising slightly from 22% to 23%, and stock options dropped from 52% of the LTI pie to just 46%. As recently as 2002, stock options made up 76% of CEO LTI pay.


"We have been predicting the rise of performance-based equity awards for several years," said Diane Doubleday, global leader of Mercer's executive remuneration business. "At the heart of shareholders' expectations for pay aligned with performance is the structure of long-term equity programs, specifically programs that vest or pay out based on performance. As of 2006, the accounting rules that facilitate using performance-based equity were in effect for almost all companies. As a result, we now see a significant increase in performance shares and performance-contingent restricted stock.  In addition, the new disclosure rules include previously unknown information about performance goals and targets."


"Target-setting will be the next area of focus, as companies are forced to define how performance is being measured and rewarded," said Peter Chingos, a senior executive compensation consultant with Mercer. "The increased disclosure and need for analysis is also likely to cause many companies to simplify their programs. The process of preparing the Compensation Discussion and Analysis (CD&A) caused some companies to make changes and will probably prompt more to simplify and clarify the performance criteria in their compensation programs. This could range from tweaking the programs to making major changes to ensure clarity to external audiences."


Did shareholders get what they wanted?  They continue to be unhappy with what they perceive as slow progress on reining in CEO pay. Several institutional investors have focused their efforts on having a greater influence on compensation.  This year there are more than 60 proposals for a "say on pay" – a proposal to put executive compensation to a non-binding vote by shareholders. In addition, shareholders have put forward more specific proposals to limit severance and require pay to be more tightly linked to performance. With majority voting for directors becoming widespread this year, directors who have been at the heart of controversy are more likely to hear shareholders' dissatisfaction loud and clear.


And many believe that the disclosures were so lengthy and confusing that shareholders' objectives have not been achieved.  Mercer's crystal ball anticipates further refinement of the disclosure rules before next year's proxy season."